Author Topic: Should I continue contributing to Roth 401k  (Read 11950 times)

starguru

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Should I continue contributing to Roth 401k
« on: November 21, 2014, 09:05:56 AM »
History:  I was an independent contractor for a bunch of years, maxing out my SEP IRA.  Two years ago I became a full time employee and when I set up my 401k, I decided to do a 50/50 split between traditional and Roth.  The rational was I dont know the future, so take some tax benefit now and some in the future, where taxes will almost certainly be higher. 

However, Im wondering if I should just do all traditional.  My (our, with the wife) marginal rate is 35%, very close to the 39% limit.  Im wondering if I should just take the tax break now.  Any insights on this?  Should I stay the course?

Gone Fishing

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Re: Should I continue contributing to Roth 401k
« Reply #1 on: November 21, 2014, 09:16:58 AM »
Change your contributions to "Traditional" 401(k), NOW!  Your effective tax rate in retirement will almost certainly be lower than 35%! 

I made this same mistake when my company started offering a ROTH 401(k) several years ago, figured I was hedging against rising tax rates.  I didn't realize just how much of a disservice I was doing myself since I was planning to retire early.

Read the first link in my signature line for detailed information on why you should be deferring all the tax you can.   

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #2 on: November 21, 2014, 09:24:57 AM »
So Close,

thank you for the reply.  I should mention, I am not particularly mustachian; I save a lot of money, but not thanks to be exceptionally frugal.  The Roth conversion strategies depend on being in a low marginal bracket after retiring early.  Currently the plan is to work for a while, as I want to build a sizeable nest egg, more than the 25x spending formula that I think is fundamentally broken as it has absolutely no buffer for disaster.  I am 37 now, I might start considering retirement around 50.  I enjoy working.  Of course, that could change.   Does any of that change the analysis?


Gone Fishing

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Re: Should I continue contributing to Roth 401k
« Reply #3 on: November 21, 2014, 10:00:45 AM »
You need to be comparing your post retirement effective tax rate against your current marginal tax rate.  Use your current spending level to guess at what your effective tax rate will be in retirement using this site http://www.taxact.com/tools/tax-bracket-calculator.asp.  My guess is that you will be close to 20-25% effective vs your current 35% marginal.  Sure the difference is not as great for a high income earner like yourself, vs a MMM style budget (which could be as high as 25%). Given your income, it probably just a drop in the bucket compared to your taxable investments, and who knows what will happen to tax rates in the next 13 years, but I think it would be quite a stretch for rates to increase 10-15%.   

GGNoob

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Re: Should I continue contributing to Roth 401k
« Reply #4 on: November 21, 2014, 10:14:37 AM »
I would go 100% Traditional 401k. You will basically be saving 35% on taxes now and I'm assuming you will be in a lower tax bracket in retirement.

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #5 on: November 21, 2014, 10:54:44 AM »
Thanks for all the replies.  Everyone is saying go full on with traditional 401k.  Yeah that's what Im thinking, just trying to figure out if there is anything I am missing.

seattlecyclone

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Re: Should I continue contributing to Roth 401k
« Reply #6 on: November 21, 2014, 11:23:53 AM »
One possible argument for the Roth would be if you plan to retire in a state with significantly higher income taxes than your current state. Even then, at your current tax bracket the traditional almost certainly still wins.

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Re: Should I continue contributing to Roth 401k
« Reply #7 on: November 21, 2014, 12:05:22 PM »
Same advice from me even after reading your second post. Unless you plan on working until 80, you should change it.

The thing is, even if you draw $150K/year from a T.IRA or convert that amount to a Roth, you will first be paying 10% tax, then 15%, then 25%..... so your effective rate will certainly be less than the 35% you are currently paying.

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Re: Should I continue contributing to Roth 401k
« Reply #8 on: November 21, 2014, 12:05:45 PM »
Just got done fiddling with the effective rate calculator I posted earlier.  It looks like it actually over states the effective rate because it simply calculates total tax vs taxable income, not gross income.

This one appears to work a little better:

http://www.calcxml.com/calculators/federal-income-tax-calculator?skn=527#top

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #9 on: November 21, 2014, 03:38:19 PM »
Just got done fiddling with the effective rate calculator I posted earlier.  It looks like it actually over states the effective rate because it simply calculates total tax vs taxable income, not gross income.

This one appears to work a little better:

http://www.calcxml.com/calculators/federal-income-tax-calculator?skn=527#top

Not sure about that calculator, I put in 450k of income, 36000 in deductions, and 1 kid and it spit out that we owe 110k.  I don't think thats even close. 

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #10 on: November 21, 2014, 03:41:04 PM »
Same advice from me even after reading your second post. Unless you plan on working until 80, you should change it.

The thing is, even if you draw $150K/year from a T.IRA or convert that amount to a Roth, you will first be paying 10% tax, then 15%, then 25%..... so your effective rate will certainly be less than the 35% you are currently paying.

My current *marginal* rate is 35, it might bump up to the 39 this year, but just barely if it does. 

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #11 on: November 21, 2014, 06:07:19 PM »
Not sure about that calculator, I put in 450k of income, 36000 in deductions, and 1 kid and it spit out that we owe 110k.  I don't think thats even close.

From your posts I'm guessing there is you + spouse + child = 3 exemptions.

$450,000 gross - $36,000 deductions - $11,850 exemptions = $402,150 taxable income.

Except, due to the high AGI, both the deduction and exemption amounts get reduced by the IRS, so you have

$450,000 gross - $31,652 deductions - $0 exemptions = $418,348 taxable income.

From https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/2014-Federal-Tax-Rate-Schedules/INF12044.html we have
If taxable income is
  overó    but not overó      the tax is:
$226,850    $405,100    $50,765 plus 33% of the amount over $226,850
$405,100    $457,600    $109,587.50 plus 35% of the amount over $405,100

$109,587.50 + 35% * ($418,348 - $405,100) = $114,224

Depends on the definition of "close" regarding the difference between $114,224 vs. $110,000.

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #12 on: November 22, 2014, 09:30:50 AM »
Not sure about that calculator, I put in 450k of income, 36000 in deductions, and 1 kid and it spit out that we owe 110k.  I don't think thats even close.

From your posts I'm guessing there is you + spouse + child = 3 exemptions.

$450,000 gross - $36,000 deductions - $11,850 exemptions = $402,150 taxable income.

Except, due to the high AGI, both the deduction and exemption amounts get reduced by the IRS, so you have

$450,000 gross - $31,652 deductions - $0 exemptions = $418,348 taxable income.

From https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/2014-Federal-Tax-Rate-Schedules/INF12044.html we have
If taxable income is
  overó    but not overó      the tax is:
$226,850    $405,100    $50,765 plus 33% of the amount over $226,850
$405,100    $457,600    $109,587.50 plus 35% of the amount over $405,100

$109,587.50 + 35% * ($418,348 - $405,100) = $114,224

Depends on the definition of "close" regarding the difference between $114,224 vs. $110,000.

No that's pretty close.  And thank you for the detailed analysis!! holy shit, are you an accountant? A couple more points

1.  We also have mortgage interest (probably around 20k). how would that affect this. 
2.  I forgot, currently we only  have a total of 17,500 for 401k deductions, since half for both the wife and I are going into Roths, so the 36k number is off.
3.  Im actually not sure what our income is going to be but 400-450k seems reasonable.

Surprised to learn that the tax benefits of 401k contributions are limited for high earners.

Does any of this change the analysis vis-a-vis Roth vs Traditional 401k?

Edit: And, to be clear, does it only make sense to go 100% Traditional if the plan is to then do a Roth conversion strategy later?
« Last Edit: November 22, 2014, 09:34:10 AM by starguru »

beltim

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Re: Should I continue contributing to Roth 401k
« Reply #13 on: November 22, 2014, 09:43:06 AM »
100% traditional is likely the optimal scenario for you because of your current marginal rate, unless there are other circumstances like seattlecyclone mentioned (or you want a similar income in retirement!).  That said, the analysis is more complex than what soclose described.  A full analysis would require taking into account your existing tax-deferred assets, any taxable assets, any pension, and social security, all of which have distinct tax implications. 

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #14 on: November 22, 2014, 10:01:53 AM »
100% traditional is likely the optimal scenario for you because of your current marginal rate, unless there are other circumstances like seattlecyclone mentioned (or you want a similar income in retirement!).  That said, the analysis is more complex than what soclose described.  A full analysis would require taking into account your existing tax-deferred assets, any taxable assets, any pension, and social security, all of which have distinct tax implications.

I currently have about

53K Roths (A dedicated roth and the 401k component)
340K in SEP, Rollover, 401k
270K in personal accounts

I don't know the wife's holdings exactly, but IIRC the last time I checked they are about 550k, split around 50/50 between tax deferred and regular.  Wife is a gubment employee and will get a pension.  Me no pension.  We should max out the SS benefits but laws will probably change before we are eligible so no way to know; we expect (with disgust) nothing.
« Last Edit: November 22, 2014, 10:03:25 AM by starguru »

beltim

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Re: Should I continue contributing to Roth 401k
« Reply #15 on: November 22, 2014, 10:39:25 AM »
All important info.  So a double max Social Security is about $48k at age 62, $60k at age 65, and $84k at age 70 (http://www.ssa.gov/oact/cola/examplemax.html).  Social Security isn't going away, the most pessimistic anyone could possible be about Social Security (nothing ever changes, benefits are only ever paid out of dedicated Social Security funds) results in full Social Security benefit until 2033, then 70% of benefits will be paid out from then.

If you retire around age 50, the benefit will probably be 10-15% less, depending on your career earnings trajectory.  A federal pension for someone working 25 years retiring at age 50 is 25% of the salary, but it doesn't start until around age 60.  So from those three sources alone (and making wild guesses about your wife's salary), the two of you will have $65 - 110k in income beginning sometime in your 60s.  That completely fills up the 10% bracket and probably all of the 15% bracket as well.

You currently have about $700k in traditional retirement assets.  Assuming a 5.5% real return of the next 13 years, that will double.  Assuming you take 4% withdrawals from your retirement assets, that's another $56k in income, which will come pretty close to filling up the 25% bracket.

So, assuming a somewhat traditional retirement age, any additional traditional 401k contributions will be withdrawn in retirement at probably a 28% bracket, saving you about 7% compared to the Roth option (assuming constant tax rates, brackets, and state taxes).  Paying 7% for tax diversification isn't a terrible decision considering your already substantial retirement assets, but it only pays off if tax rates go up for you in retirement.

However!  If you're serious about retiring early, then the traditional 401k benefits you even more, because you'll be funding your retirement for 10-20 years before receiving any pension or Social Security money, meaning that you have all those lower tax brackets to fill up before the marginal rate hits your marginal rate after age 70.

So, in the end, my analysis still suggests that 100% traditional is the way to go, unless you expect to move to a high-tax state and not retire until your 60s.  However, the benefit will be in the 7% range (more if you retire early and have lower income), and nowhere near the "current marginal rate - retirement effective rate" (terrible) rule of thumb.

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #16 on: November 22, 2014, 10:56:22 AM »
No that's pretty close.  And thank you for the detailed analysis!! holy shit, are you an accountant? A couple more points

1.  We also have mortgage interest (probably around 20k). how would that affect this. 
2.  I forgot, currently we only  have a total of 17,500 for 401k deductions, since half for both the wife and I are going into Roths, so the 36k number is off.
3.  Im actually not sure what our income is going to be but 400-450k seems reasonable.

Surprised to learn that the tax benefits of 401k contributions are limited for high earners.

Does any of this change the analysis vis-a-vis Roth vs Traditional 401k?

Edit: And, to be clear, does it only make sense to go 100% Traditional if the plan is to then do a Roth conversion strategy later?
Thanks, and thanks for the laugh - no I'm not an accountant, just someone with a bit of experience using spreadsheets.

One nice thing about spreadsheets (really, doing any type of math analysis) is that it forces one to be unambiguous.  Looking at your words here, it appears I misconstrued your earlier post regarding "36000 in deductions."  I thought you meant itemized deductions (e.g. mortgage interest), but now see that you meant pre-tax deductions (e.g. 401k).

Probably best, if you are interested, for you to fill in the blanks in the spreadsheet you can download from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#msg274228.  That might allow you to answer your own questions, but if not just let us know and someone will likely give it a go.

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #17 on: November 22, 2014, 02:27:50 PM »
All important info.  So a double max Social Security is about $48k at age 62, $60k at age 65, and $84k at age 70 (http://www.ssa.gov/oact/cola/examplemax.html).  Social Security isn't going away, the most pessimistic anyone could possible be about Social Security (nothing ever changes, benefits are only ever paid out of dedicated Social Security funds) results in full Social Security benefit until 2033, then 70% of benefits will be paid out from then.

If you retire around age 50, the benefit will probably be 10-15% less, depending on your career earnings trajectory.  A federal pension for someone working 25 years retiring at age 50 is 25% of the salary, but it doesn't start until around age 60.  So from those three sources alone (and making wild guesses about your wife's salary), the two of you will have $65 - 110k in income beginning sometime in your 60s.  That completely fills up the 10% bracket and probably all of the 15% bracket as well.

You currently have about $700k in traditional retirement assets.  Assuming a 5.5% real return of the next 13 years, that will double.  Assuming you take 4% withdrawals from your retirement assets, that's another $56k in income, which will come pretty close to filling up the 25% bracket.

So, assuming a somewhat traditional retirement age, any additional traditional 401k contributions will be withdrawn in retirement at probably a 28% bracket, saving you about 7% compared to the Roth option (assuming constant tax rates, brackets, and state taxes).  Paying 7% for tax diversification isn't a terrible decision considering your already substantial retirement assets, but it only pays off if tax rates go up for you in retirement.

However!  If you're serious about retiring early, then the traditional 401k benefits you even more, because you'll be funding your retirement for 10-20 years before receiving any pension or Social Security money, meaning that you have all those lower tax brackets to fill up before the marginal rate hits your marginal rate after age 70.

So, in the end, my analysis still suggests that 100% traditional is the way to go, unless you expect to move to a high-tax state and not retire until your 60s.  However, the benefit will be in the 7% range (more if you retire early and have lower income), and nowhere near the "current marginal rate - retirement effective rate" (terrible) rule of thumb.

The current plan is to not consider retirement until i have around $4MM by myself.  Again, I don't believe that 4% WR is safe.  Retirement account contributions are limited to the 18k max, so most of my assets will be in personal accounts, which is actually good since there are no mandatory withdrawal requirements there.   On my current trajectory I can probably hit that in my early 50s assuming normal market returns.   I really enjoy my job so I feel no urges to stop working.  If things change I will of course reevaluate. 

I found your paragraph re paying 7% for tax diversification interesting.  Why are you assuming taxes won't be higher in the future?

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #18 on: November 22, 2014, 02:46:46 PM »
No that's pretty close.  And thank you for the detailed analysis!! holy shit, are you an accountant? A couple more points

1.  We also have mortgage interest (probably around 20k). how would that affect this. 
2.  I forgot, currently we only  have a total of 17,500 for 401k deductions, since half for both the wife and I are going into Roths, so the 36k number is off.
3.  Im actually not sure what our income is going to be but 400-450k seems reasonable.

Surprised to learn that the tax benefits of 401k contributions are limited for high earners.

Does any of this change the analysis vis-a-vis Roth vs Traditional 401k?

Edit: And, to be clear, does it only make sense to go 100% Traditional if the plan is to then do a Roth conversion strategy later?
Thanks, and thanks for the laugh - no I'm not an accountant, just someone with a bit of experience using spreadsheets.

One nice thing about spreadsheets (really, doing any type of math analysis) is that it forces one to be unambiguous.  Looking at your words here, it appears I misconstrued your earlier post regarding "36000 in deductions."  I thought you meant itemized deductions (e.g. mortgage interest), but now see that you meant pre-tax deductions (e.g. 401k).

Probably best, if you are interested, for you to fill in the blanks in the spreadsheet you can download from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#msg274228.  That might allow you to answer your own questions, but if not just let us know and someone will likely give it a go.

Yeah sorry about that, not sure of the correct terminology.  Going to start playing with that spread sheet.

Edit:  Ok this is complicated.  About half of my earnings are in the form of RSU distributions.  To get 450k in yearly income, i had to enter monthly income of 37.5k, but my RSUs only come a few months a year.  Not sure its accurate.  Also, I do get an ESPP, to which I contribute 10% of my salary (max).  Also, opened in google docs, I see a lot of #NAME?  Regardless of that, it spits out AGI of 391 but no federal tax.
« Last Edit: November 22, 2014, 03:05:09 PM by starguru »

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #19 on: November 22, 2014, 03:49:43 PM »
About half of my earnings are in the form of RSU distributions.  To get 450k in yearly income, i had to enter monthly income of 37.5k, but my RSUs only come a few months a year.  Not sure its accurate.  Also, I do get an ESPP, to which I contribute 10% of my salary (max).  Also, opened in google docs, I see a lot of #NAME?  Regardless of that, it spits out AGI of 391 but no federal tax.
Entering an annual income divided by 12 for the monthly income is ok.  That's how many (including me) do it, for reasons similar to yours.
Row 16 is for ESPP contributions.  For the purposes of FIRE calculations at the bottom, ESPP contributions are assumed to have the same returns as any generic taxable investment.  Any employer-paid amount as part of the ESPP program is usually included on a W-2 as part of your annual salary.

From the Instructions tab of the spreadsheet:
Quote
If #NAME? appears in cell B33, you have likely opened the spreadsheet with macros disabled, and a suggestion to open the spreadsheet   
   with macros enabled will appear in cell C31. If enabling macros bothers you and you don't want to proceed further, so be it.
   The "macros", however, are merely two Visual Basic functions: one calculates federal taxes for married-filing-jointly, and the
   other for single filers.
I'm not a google docs expert, so don't know how it implements Excel's Visual Basic functions.  But I'm open to suggestions...?
« Last Edit: November 22, 2014, 08:31:50 PM by MDM »

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #20 on: November 22, 2014, 08:44:04 PM »
I'm not a google docs expert, so don't know how it implements Excel's Visual Basic functions.  But I'm open to suggestions...?
Well, one way around the problem is to remove the VB functions and use a series of common Excel functions (VLOOKUP) instead.  I was reluctant to do that because it isn't as clean, but if the use of VB does prevent some from using the tool then that's worse.

So (assuming google docs handles VLOOKUP), all the #NAME? problems should go away if you use the version now posted in the Google Drive link.  Could you confirm?

Probably should have done this earlier - thanks for providing the motivation.

beltim

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Re: Should I continue contributing to Roth 401k
« Reply #21 on: November 23, 2014, 10:26:36 AM »
I found your paragraph re paying 7% for tax diversification interesting.  Why are you assuming taxes won't be higher in the future?

Newton's First Law of Motion.  In the absence of any evidence that taxes will increase in the future, it seems like the safest bet it to plan on constant tax rates.

Either way, though, 7% is the current anticipated price for tax diversification.  If you think that when you retire, income that is currently taxed at 28% will then be taxed at a rate greater than 35%, then you should pick the Roth 401k option.
« Last Edit: November 23, 2014, 03:27:55 PM by beltim »

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #22 on: November 23, 2014, 03:05:49 PM »
I'm not a google docs expert, so don't know how it implements Excel's Visual Basic functions.  But I'm open to suggestions...?
Well, one way around the problem is to remove the VB functions and use a series of common Excel functions (VLOOKUP) instead.  I was reluctant to do that because it isn't as clean, but if the use of VB does prevent some from using the tool then that's worse.

So (assuming google docs handles VLOOKUP), all the #NAME? problems should go away if you use the version now posted in the Google Drive link.  Could you confirm?

Probably should have done this earlier - thanks for providing the motivation.

It appears to be working as a Google Doc now.  I also just downloaded it; works in Number on OS X too.  Pasting the table in, wow, looks pretty good.  Not sure about the calculations way at the bottom though; haven't put in any expenses yet.

CategoryMonthly amt.CommentsAnnual
Salary/Wages$37,500$450,000
Pretax Health Ins.$1,200$14,400
Healthcare Flex Savings Acct. (FSA)$70$840
Daycare FSA$417At maximum$5,000
FICA base salary/wages$35,813$429,760
401(k) / 403(b) / 457(b) / etc.$1,458At maximum$17,500
Employer Match$1,000$12,000
Income subject to IRS tax$34,355$412,260
ESPP/After-tax 401k$1,500$18,000
Paycheck income before tax$32,855$394,260
Federal Adj. Gross Inc.$34,355$412,260
Federal tax$9,4462014 rates, item. ded., 1 exemption$113,353
State/City tax$1,890Guess, using .50% * Fed. AGI$22,674
Soc. Sec.$605Assumes 1 earner paying$7,254
Medicare$692$8,299
Total income taxes$12,632$151,584
Add Daycare reimb.$417$5,000
Add Health care reimb.$70$840
Income before other expenses  $20,710$248,516
Monthly Expenses:
Loans:
Total to invest$20,710$248,516
Other investments$20,710$248,516
"Gross" income$37,500$450,000
Income taxes$12,632$151,584
FSA add-backs$487$5,840
After-tax income$25,355$304,256
IRA+401k+ESPP+529/other$2,958$35,500
Living expenses$1,687$20,240
After-tax investable$20,710$248,516
Income after RE (pension, SS, etc.)180000/year
Time to FIRE10years
Safe Withdrawal Rate0.04percent
Real return on tax-deferred investments0.05percent
Real, after tax, return on taxable investments0.0375percent
Expected retirement total tax rate0.2
Taxable2949347.745
Tax-deferred (e.g. trad. IRA/401k)371047.8298
Total projected stash3320395.575
Stash for retirement expenses @4.0% SWR-4500000needed
Have $7,820,396 extra.
« Last Edit: November 23, 2014, 03:10:08 PM by starguru »

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #23 on: November 23, 2014, 05:01:00 PM »
I started added expenses and playing with rows 131+.  Does the spread sheet assume excess income is invested?  How do I tell it how much we add every year to our investments?

Edit: confused about line 131, is that the amount we expect to receive in SS, Pension, whatever?  Or is that the income we want to have in retirement. 
« Last Edit: November 23, 2014, 05:07:05 PM by starguru »

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #24 on: November 23, 2014, 05:56:05 PM »
I started added expenses and playing with rows 131+.  Does the spread sheet assume excess income is invested?  How do I tell it how much we add every year to our investments?

Edit: confused about line 131, is that the amount we expect to receive in SS, Pension, whatever?  Or is that the income we want to have in retirement.
Yes, it does assume the excess of spendable income over expenses is invested.  After all, this is the MMM site.... :)
One can always put 0% (or even -inflation%) for the real return on taxable investment if desired.

For tax-advantaged investing, it relies on the numbers you enter "up top" for 401k, IRAs, ESPPs, etc.

Yes, line 131 is for any "extra" income stream one expects.  That amount is subtracted from expenses expected in retirement to determine the income stream needed from investments.  Thus you do have to fill in something for expenses, even if all you do is put one big number in Miscellaneous.

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #25 on: November 23, 2014, 05:59:47 PM »
It appears to be working as a Google Doc now.  I also just downloaded it; works in Number on OS X too.  Pasting the table in, wow, looks pretty good.  Not sure about the calculations way at the bottom though; haven't put in any expenses yet.

Thanks for running those tests!  Any suggestions for improvements (especially notes on pure errors) appreciated.

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #26 on: November 23, 2014, 06:36:24 PM »
Here is some updated output

From what I am gathering, it is saying I will be $484000 short assuming I want a 2% WR.  But it also says I have 2158000 extra.  Still confused. :)

Also, there is a graph at the bottom but it doesn't appear to respond to any inputs. 
Also, is there a way to put expected future expenses in (more kids, kids school, etc)?
Sadly, the cells work in Number on OS X but copying the HTML form the Posting tab does not appear to work.

Edit:  Hmm something still off, entering data in rows 138-140 does not cause any changes in rows 143+
Edit Edit:  Fuck me, I was entering data in the Posting tab.  The cells update after modifying 138-140, although the conclusions are still a bit confusing.

CategoryMonthly amt.CommentsAnnual
Salary/Wages$37,500$450,000
Pretax Health Ins.$1,200$14,400
Healthcare Flex Savings Acct. (FSA)$70$840
Daycare FSA$417At maximum$5,000
FICA base salary/wages$35,813$429,760
401(k) / 403(b) / 457(b) / etc.$1,458At maximum$17,500
Employer Match$1,000$12,000
Income subject to IRS tax$34,355$412,260
ESPP/After-tax 401k$1,500$18,000
Paycheck income before tax$32,855$394,260
Federal Adj. Gross Inc.$34,355$412,260
Federal tax$8,8032014 rates, item. ded., 1 exemption$105,631
State/City tax$1,890Guess, using .50% * Fed. AGI$22,674
Soc. Sec.$605Assumes 1 earner paying$7,254
Medicare$692$8,299
Total income taxes$11,988$143,856
Add Daycare reimb.$417$5,000
Add Health care reimb.$70$840
Income before other expenses  $21,354$256,244
Monthly Expenses:
Mortgage$2,700$32,400
HOA$70$840
Property Tax$600$7,200
Home/Rent Insurance$100$1,200
Cable TV$170$2,040
Car Insurance$70$840
Childcare$1,140$13,680
Dining (Pizza, Restaurant, etc.)$350$4,200
Electricity$100$1,200
Gas/Oil for heating$50$600
Groceries$400$4,800
Household; Maintenance$100$1,200
Landscaping/Yard work$64$768
Miscellaneous$1,000$12,000
Phone (cell)$120$1,440
Recycling/Trash$32$384
Water/Sewer$80$960
Wine/Beer/Tobacco$200$2,400
Non-mortgage total$4,646$55,752
Loans:
Total Expense$7,346$88,152
Total to invest$14,008$168,092
Other investments$14,008$168,092
"Gross" income$37,500$450,000
Income taxes$11,988$143,856
FSA add-backs$487$5,840
After-tax income$25,999$311,984
IRA+401k+ESPP+529/other$2,958$35,500
Living expenses$9,033$108,392
After-tax investable$14,008$168,092
Income after RE (pension, SS, etc.)60000/year
Time to FIRE10years
Safe Withdrawal Rate0.02percent
Real return on tax-deferred investments0.08percent
Real, after tax, return on taxable investments0.06percent
Expected retirement total tax rate0.2
Taxable555000
Tax-deferred (e.g. trad. IRA/401k)600000
Roth75000
Taxable3200552.417
Tax-deferred (e.g. trad. IRA/401k)1722708.591
Roth161.9193748
Total projected stash4923422.927
Non-loan, non-work expenses55752
Income taxes13938
Total69690
Stash for retirement expenses @2.0% SWR484500needed
Have $4,438,923 extra.
« Last Edit: November 23, 2014, 06:46:28 PM by starguru »

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #27 on: November 23, 2014, 07:20:08 PM »
Here is some updated output

From what I am gathering, it is saying I will be $484000 short assuming I want a 2% WR.  But it also says I have 2158000 extra.  Still confused. :)

Also, there is a graph at the bottom but it doesn't appear to respond to any inputs. 
Also, is there a way to put expected future expenses in (more kids, kids school, etc)?
Sadly, the cells work in Number on OS X but copying the HTML form the Posting tab does not appear to work.

Edit:  Hmm something still off, entering data in rows 138-140 does not cause any changes in rows 143+
Edit Edit:  Fuck me, I was entering data in the Posting tab.  The cells update after modifying 138-140, although the conclusions are still a bit confusing.
starguru, thanks, you are giving this a good workout.

Appear to be a few semantic issues: the $484,500 is the "amount needed" to support your desired retirement spending of $69,690 (minus the $60000/yr you are getting from pension, etc.) at a 2% WR.  I.e., $69,690 - $60,000 = $9,690.  $9,690 / 2% = $484,500.  But you will "actually have" ~$4.9 million, so you will have ~4.5 million extra in the specified 10 years from now.

Re: "Also, is there a way to put expected future expenses in (more kids, kids school, etc)?" - You can enter a non-zero value in this row:
Change in spending after RE   $0   /year

To get into details such as "assume spending $30K/yr for college starting in 18 and lasting 4 years", well, that's where I recommend www.cfiresim.com.



The graph was scaled to +/- $1 million.  Your results are literally off the chart.  Allow for auto-scaling on the y-axis and you will see


It appears you are scraping by and should be ok.... :)
« Last Edit: November 23, 2014, 07:25:23 PM by MDM »

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #28 on: November 23, 2014, 07:28:34 PM »
MDM

Thank you for sticking with me and for the awesome spreadsheet. 

Something must be off; Im not worried about retirement but this thing is telling me that by 60 we will have $15M in the bank, and thats just silly.  I must have entered something incorrectly.  How do I tell it I want 150k in income after stopping work, so pension + SS + withdrawal from assets === 150k?

Edit: to clarify, according to you it thinks i need ~500k in savings for retirement? I must have not entered that I wan 150k of yearly income in retirement.  500k simply will not support that.  I think the graph is assuming I don't stop working. 
« Last Edit: November 23, 2014, 07:30:37 PM by starguru »

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #29 on: November 23, 2014, 08:00:05 PM »
Something must be off; Im not worried about retirement but this thing is telling me that by 60 we will have $15M in the bank, and thats just silly.  I must have entered something incorrectly.  How do I tell it I want 150k in income after stopping work, so pension + SS + withdrawal from assets === 150k?

Edit: to clarify, according to you it thinks i need ~500k in savings for retirement? I must have not entered that I wan 150k of yearly income in retirement.  500k simply will not support that.  I think the graph is assuming I don't stop working.
starguru, here are a few changes you might consider:
  - Use 5% (instead of 8%) for "Real return on tax-deferred investments".  Note that "real" in this context means "after inflation."  If inflation = 3%, a nominal return of 8% would be a real return of 5%.
  - Use 30% (instead of 20%) for "Expected retirement total tax rate."  This is a tough one to guess, because it will be a blend of Roth withdrawals at 0%, dividends and capital gains at 15%, and pensions, interest, etc. at whatever your marginal rate will be - plus state+local taxes, with whatever rules they have.
  - Enter $94,248 for "Change in spending after RE".  Added to the $55,572 calculated from current spending, that will give you $150K in total spending.  At a 30% tax rate, there will be another $64,286 in taxes. 

If you want the $150K income to cover taxes also, adjust "Expected retirement total tax rate" and "Change in spending after RE", e.g. 25% and $56,748 respectively.



starguru

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Re: Should I continue contributing to Roth 401k
« Reply #30 on: November 23, 2014, 08:06:41 PM »
Something must be off; Im not worried about retirement but this thing is telling me that by 60 we will have $15M in the bank, and thats just silly.  I must have entered something incorrectly.  How do I tell it I want 150k in income after stopping work, so pension + SS + withdrawal from assets === 150k?

Edit: to clarify, according to you it thinks i need ~500k in savings for retirement? I must have not entered that I wan 150k of yearly income in retirement.  500k simply will not support that.  I think the graph is assuming I don't stop working.
starguru, here are a few changes you might consider:
  - Use 5% (instead of 8%) for "Real return on tax-deferred investments".  Note that "real" in this context means "after inflation."  If inflation = 3%, a nominal return of 8% would be a real return of 5%.
  - Use 30% (instead of 20%) for "Expected retirement total tax rate."  This is a tough one to guess, because it will be a blend of Roth withdrawals at 0%, dividends and capital gains at 15%, and pensions, interest, etc. at whatever your marginal rate will be - plus state+local taxes, with whatever rules they have.
  - Enter $94,248 for "Change in spending after RE".  Added to the $55,572 calculated from current spending, that will give you $150K in total spending.  At a 30% tax rate, there will be another $64,286 in taxes. 

If you want the $150K income to cover taxes also, adjust "Expected retirement total tax rate" and "Change in spending after RE", e.g. 25% and $56,748 respectively.

MDM, awesome thanx.  Yeah adjusting the %return definitely affects things.  Wonder whats reasonable; aren't historical returns 10% after inflation?

 Just 2 more questions. 

1.  Is there a way to enter Roth contributions?  Way up at the top i only see a row for 401k and a row for IRA. 
2.  Also, I still can't get the chart to work on google docs.  How did you configure the y-axis to auto grow?

Edit: Are you saying the tool takes row d99 (non mortgage spending) and assumes that is the baseline to maintain in retirement?  My only goal in making the number 150k is to keep my stache growing; I actually don't plan on spending that much, some of it would go increasing my holdings.  But that doesn't make no sense if my withdrawal amount is less than my growth amount -- there is no need to build in extra.
« Last Edit: November 23, 2014, 08:18:39 PM by starguru »

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #31 on: November 23, 2014, 08:11:57 PM »
This tool is so useful for modeling.  I can double the childcare expense to see what effect that has on FI dates.  Although its hard to model since daycare expenses only last a till they enter school (assuming no private school).  Also lets us see how different stock market return scenarios affect things.  Very interesting indeed.


MDM

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Re: Should I continue contributing to Roth 401k
« Reply #32 on: November 23, 2014, 09:03:06 PM »
MDM, awesome thanx.  Yeah adjusting the %return definitely affects things.  Wonder whats reasonable; aren't historical returns 10% after inflation?

 Just 2 more questions. 

1.  Is there a way to enter Roth contributions?  Way up at the top i only see a row for 401k and a row for IRA. 
2.  Also, I still can't get the chart to work on google docs.  How did you configure the y-axis to auto grow?

Edit: Are you saying the tool takes row d99 (non mortgage spending) and assumes that is the baseline to maintain in retirement?  My only goal in making the number 150k is to keep my stache growing; I actually don't plan on spending that much, some of it would go increasing my holdings.  But that doesn't make no sense if my withdrawal amount is less than my growth amount -- there is no need to build in extra.
starguru, you're entirely welcome.  The more this gets exercised, the more likely any mistakes will be found and fixed.   

For expected returns: http://www.bogleheads.org/wiki/Historical_and_expected_returns.  Even experts can't agree.

Roth contributions:  look near row 107 for
Roth IRA
Roth 401k/403b
529 plan/ other investment

Sorry, can't help w/ google docs.  In Excel I double click on the y-axis and have the option of fixing the scale or letting the program do auto-scale.

Re: " Are you saying the tool takes row d99 (non mortgage spending) and assumes that is the baseline to maintain in retirement?"
  - Pretty much.  It will subtract "Work/professional fees", subtract "union dues", add "Change in spending after RE" and add taxes required to have net income equal spending.  That becomes the total income you need.  From that, "Income after RE (pension, SS, etc.)" is subtracted to determine the amount your stash must provide each year.  The "Safe Withdrawal Rate" you specify then determines the size stash needed.

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #33 on: November 23, 2014, 09:09:04 PM »
This tool is so useful for modeling.  I can double the childcare expense to see what effect that has on FI dates.  Although its hard to model since daycare expenses only last a till they enter school (assuming no private school).  Also lets us see how different stock market return scenarios affect things.  Very interesting indeed.
Forgot to mention - do you have the correct number of exemptions in cell G9?  I matched your numbers by using 1 exemption, but if you have a spouse and child then you have 3.  Putting >1 exemption will also cause the model to use "Married Filing Jointly" instead of "Single" rates.  Yes, I know this isn't foolproof logic....

Joel

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Re: Should I continue contributing to Roth 401k
« Reply #34 on: November 23, 2014, 09:22:15 PM »
At a 35% marginal tax rate, you should almost always be making traditional 401k contributions u less you have enough retirement income already set aside to put your expected marginal tax rate in retirement at the 35% level. And if you had that much, you would be retired already!

By the way, what do you do and how does one get into that field?!

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #35 on: November 24, 2014, 10:10:59 AM »
MDM, awesome thanx.  Yeah adjusting the %return definitely affects things.  Wonder whats reasonable; aren't historical returns 10% after inflation?

 Just 2 more questions. 

1.  Is there a way to enter Roth contributions?  Way up at the top i only see a row for 401k and a row for IRA. 
2.  Also, I still can't get the chart to work on google docs.  How did you configure the y-axis to auto grow?

Edit: Are you saying the tool takes row d99 (non mortgage spending) and assumes that is the baseline to maintain in retirement?  My only goal in making the number 150k is to keep my stache growing; I actually don't plan on spending that much, some of it would go increasing my holdings.  But that doesn't make no sense if my withdrawal amount is less than my growth amount -- there is no need to build in extra.
starguru, you're entirely welcome.  The more this gets exercised, the more likely any mistakes will be found and fixed.   

For expected returns: http://www.bogleheads.org/wiki/Historical_and_expected_returns.  Even experts can't agree.

Roth contributions:  look near row 107 for
Roth IRA
Roth 401k/403b
529 plan/ other investment

Sorry, can't help w/ google docs.  In Excel I double click on the y-axis and have the option of fixing the scale or letting the program do auto-scale.

Re: " Are you saying the tool takes row d99 (non mortgage spending) and assumes that is the baseline to maintain in retirement?"
  - Pretty much.  It will subtract "Work/professional fees", subtract "union dues", add "Change in spending after RE" and add taxes required to have net income equal spending.  That becomes the total income you need.  From that, "Income after RE (pension, SS, etc.)" is subtracted to determine the amount your stash must provide each year.  The "Safe Withdrawal Rate" you specify then determines the size stash needed.

Aaahh I thought 107 was related to the Loans section right above.  I notice that the IRA and 401k rows (11 and 12) think I can contribute more (with comment Room to increase?) when I enter 1458 on B12 (for 17500 in the 401k between DW and myself), as well as on row 107.  Shouldn't the SS say "At Max" for those values?  Also, when I enter a value in either B106 or B107, BOTH D106 and D107 update -- is that being counted twice?   

Also, for simplicities sake, maybe move 106-108 up to the traditional 401k section.  Its a bit weird having them so far apart.  Or maybe there is a valid reason?  And don't let that (hopefully) constructive criticism detract from the praise you deserve for putting this tool together. 

Finally, might be helpful to have an uneditable row before row 131 showing the Retirement Expense base -- basically to say the tool thinks you need this much for retirement each year, based on your expenses, and then have line 151 next to that so user can adjust accordingly.  Just ideas.

And no, I didn't put in 3 for #Exempt.  I changed that value and the # of earners above it.

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #36 on: November 24, 2014, 10:11:41 AM »
At a 35% marginal tax rate, you should almost always be making traditional 401k contributions u less you have enough retirement income already set aside to put your expected marginal tax rate in retirement at the 35% level. And if you had that much, you would be retired already!

By the way, what do you do and how does one get into that field?!

Software engineer and DW is a lawyer. 

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #37 on: November 24, 2014, 11:04:46 AM »
Aaahh I thought 107 was related to the Loans section right above. 
Good point - I'll add a title to that section.

Quote
I notice that the IRA and 401k rows (11 and 12) think I can contribute more (with comment Room to increase?) when I enter 1458 on B12 (for 17500 in the 401k between DW and myself), as well as on row 107.  Shouldn't the SS say "At Max" for those values?
And no, I didn't put in 3 for #Exempt.  I changed that value and the # of earners above it.
With the two of you, the maximum is $35,000 not just $17,500.

Quote
Also, when I enter a value in either B106 or B107, BOTH D106 and D107 update -- is that being counted twice?   
Don't know how that could happen.  In the version I have the formula in D106 is =B106*12, the formula for D107 is =B107*12, and there are no formulas in either B106 or B107. 

Quote
Also, for simplicities sake, maybe move 106-108 up to the traditional 401k section.  Its a bit weird having them so far apart.  Or maybe there is a valid reason?  And don't let that (hopefully) constructive criticism detract from the praise you deserve for putting this tool together. 
There is a reason.  Don't know if it is valid, good, etc....?  The spreadsheet is organized, more or less, to follow the way many people deal with their incomes and outgoes.  It starts with "income and paycheck-related items," with the idea that people could look at pay stubs for pre-tax deductions, ESPP amounts, etc.  Then it does taxes to get to "spendable income," then living expenses (including loans).  Only then does it get to the common after-tax investment options.
I see the point about putting all the various investment options (pre-tax and after-tax) together - will have to think about that.

Quote
Finally, might be helpful to have an uneditable row before row 131 showing the Retirement Expense base -- basically to say the tool thinks you need this much for retirement each year, based on your expenses, and then have line 151 next to that so user can adjust accordingly.  Just ideas.
I'll take a look and see how that could be arranged better.

Thanks!

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #38 on: November 24, 2014, 11:20:10 AM »
Aaahh I thought 107 was related to the Loans section right above. 
Good point - I'll add a title to that section.

Quote
I notice that the IRA and 401k rows (11 and 12) think I can contribute more (with comment Room to increase?) when I enter 1458 on B12 (for 17500 in the 401k between DW and myself), as well as on row 107.  Shouldn't the SS say "At Max" for those values?
And no, I didn't put in 3 for #Exempt.  I changed that value and the # of earners above it.
With the two of you, the maximum is $35,000 not just $17,500.

Right but 17.5 for traditional and 17.5 for Roth is 35k. 

Quote
Also, when I enter a value in either B106 or B107, BOTH D106 and D107 update -- is that being counted twice?   

Quote
Don't know how that could happen.  In the version I have the formula in D106 is =B106*12, the formula for D107 is =B107*12, and there are no formulas in either B106 or B107. 

Yeah perhaps I messed it up with a copy/paste error.

Finally, going to send you a PM.
« Last Edit: November 24, 2014, 11:41:24 AM by starguru »

MDM

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Re: Should I continue contributing to Roth 401k
« Reply #39 on: November 24, 2014, 11:45:40 AM »
Quote
I notice that the IRA and 401k rows (11 and 12) think I can contribute more (with comment Room to increase?) when I enter 1458 on B12 (for 17500 in the 401k between DW and myself), as well as on row 107.  Shouldn't the SS say "At Max" for those values?
And no, I didn't put in 3 for #Exempt.  I changed that value and the # of earners above it.
With the two of you, the maximum is $35,000 not just $17,500.

Right but 17.5 for traditional and 17.5 for Roth is 35k. 

Yes, you are correct that the spreadsheet currently does not check the Roth contribution limits.  Ideally it would also recognize when AGI is too high for tIRA contributions and not suggest "Room to increase?".  Eventually....

Meanwhile - it's a feature, not a bug!  Because, given your income (as Joel noted), you should be putting your money into the traditional 401k, not a Roth 401k.  That's my story and I'm sticking to it. ;)

starguru

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Re: Should I continue contributing to Roth 401k
« Reply #40 on: December 02, 2014, 07:05:26 AM »
Just to close this down:

It's worse than I thought.  I gave my accountant the expected numbers and she said we are getting screwed by the AMT and Itemized Reduction phaseouts, as well as surtaxes.  We will have a significant tax bill for this year, even after all the taxes taken out of paychecks/RSUs sold to cover taxes.

I changed my 401k allocation to 100% traditional (DW in process to do so) and added an additional federal withholding to my W4.  dang ouch.